Question

Use the following information to answer questions 40 to 41:

CDE Ltd has provided the following budgeted Income Statement extract for the July-September quarter in 2020.

                                              July August September

                                            $,000 $’000 $’000

Sales (all on credit) 85 88 91

Purchases (43) (45) (47)

Depreciation expense (5) (5) (5)

Electricity expense (6) (6) (6)

Other expenses (25) (25) (25)

You are also given the following additional information:

• All sales are collected in cash the month after sale.

• All purchases are made on credit and paid for in cash the month after purchase.

• Electricity is paid at the end of each quarter (i.e. on 30 September)

• Other expenses are paid in cash in the same month they are incurred.

• The business plans to buy a delivery van in August for $40,000 cash.

• The cash balance is $17,000 on 31 July 2020.

Prepare a cash budget for CDE Ltd for the month of August and September.

Assess the cash position of CDE Ltd. Should CDE Ltd proceed with the purchase of delivery van as planned?

Give your reasons and suggest alternatives if applicable.

Answer 1

Cash Budget
	August	September
Beginning Balance	$              17,000	$            (6,000)
Cash Collections	$              85,000	$           88,000
Total Cash Available	$           102,000	$           82,000
Cash Disbursements
Purchases	$              43,000	$           45,000
Electricity Expense	$                      -	$           18,000
Other Expense	$              25,000	$           25,000
Van Purchase	$              40,000
Total Cash Disbursements	$           108,000	$           88,000
Ending Balance	$              (6,000)	$            (6,000)

Cash Balance falls short by $6000 with purchase of Van in August.
With the given data, CDE Ltd should not proceed with purchase of delivery van.

The company can plan to borrow money from bank for purchase of Delivery van and pay later when there will be excess cash.